HOUSE RESOURCES STANDING COMMITTEE March 31, 1998 2:16 p.m. MEMBERS PRESENT Representative Bill Hudson, Co-Chairman Representative Scott Ogan, Co-Chairman Representative Beverly Masek, Vice Chair Representative Ramona Barnes Representative Fred Dyson Representative Joe Green Representative William K. (Bill) Williams Representative Irene Nicholia Representative Reggie Joule MEMBERS ABSENT All members present OTHER HOUSE MEMBERS PRESENT Representative Mark Hodgins COMMITTEE CALENDAR HOUSE BILL NO. 393 "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." - HEARD AND HELD (* First public hearing) PREVIOUS ACTION BILL: HB 393 SHORT TITLE: DEVELOP STRANDED GAS RESOURCES SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR Jrn-Date Jrn-Page Action 2/11/98 2280 (H) READ THE FIRST TIME - REFERRAL(S) 2/11/98 2281 (H) OIL & GAS, FINANCE 2/11/98 2281 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 2281 (H) GOVERNOR'S TRANSMITTAL LETTER 2/19/98 (H) O&G AT 11:00 AM CAPITOL 124 2/19/98 (H) MINUTE(O&G) 2/24/98 (H) O&G AT 10:00 AM CAPITOL 124 2/24/98 (H) MINUTE(O&G) 2/26/98 (H) O&G AT 10:00 AM CAPITOL 124 2/26/98 (H) MINUTE(O&G) 3/03/98 (H) O&G AT 10:00 AM CAPITOL 124 3/03/98 (H) MINUTE(O&G) 3/05/98 (H) MINUTE(O&G) 3/09/98 2578 (H) RES REFERRAL ADDED 3/10/98 (H) O&G AT 10:00 AM CAPITOL 124 3/10/98 (H) MINUTE(O&G) 3/12/98 (H) O&G AT 10:00 AM CAPITOL 124 3/12/98 (H) MINUTE(O&G) 3/19/98 (H) O&G AT 10:00 AM CAPITOL 124 3/19/98 (H) MINUTE(O&G) 3/24/98 (H) O&G AT 10:00 AM CAPITOL 124 3/24/98 (H) MINUTE(O&G) 3/24/98 (H) O&G AT 5:00 PM CAPITOL 124 3/24/98 (H) MINUTE(O&G) 3/26/98 (H) O&G AT 10:00 AM CAPITOL 124 3/26/98 (H) MINUTE(O&G) 3/26/98 (H) O&G RPT PROPOSED COMMITTEE SUBSTITUTE O&G NT & ATTACHED AM 1DP 5NR DP: HODGINS; NR: BUNDE, OGAN, ROKEBERG, BRICE, KEMPLEN 3/26/98 2750 (H) 2 FISCAL NOTES (DNR, REV) 2/11/98 3/26/98 (H) RES AT 1:00 PM CAPITOL 124 3/26/98 (H) MINUTE(RES) 3/28/98 (H) RES AT 1:00 PM CAPITOL 124 3/28/98 (H) MINUTE(RES) 3/31/98 (H) RES AT 1:00 PM CAPITOL 124 WITNESS REGISTER GEORGE FINDLING, Business Development Advisor for the Gas Commercialization Group ARCO Alaska, Incorporated P.O. Box 100360 Anchorage, Alaska 99510 Telephone: (907) 263-4174 POSITION STATEMENT: Provided testimony in support of HB 393. BEVERLY MENTZER, Alaska Gas Commercialization Manger Exxon Company, USA P.O. Box 2180 Houston, Texas 77252 Telephone: (713) 656-6145 POSITION STATEMENT: Provided testimony in support of HB 393. RICK GLOVER, Attorney Legislative Legal and Research Services Legislative Affairs Agency 130 Seward Street, Suite 409 Juneau, Alaska 99801-2105 Telephone: (907) 465-2450 POSITION STATEMENT: Dafter of HB 393. Provided testimony and answered questions of the committee members on HB 393. JOHN SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1724 Telephone: (907) 465-2400 POSITION STATEMENT: Provided testimony on HB 393. DAVID BROOKS, Manager - Alaska Gas BP Exploration (Alaska) Incorporated 900 East Benson Boulevard Anchorage, Alaska 99519 Telephone: (907) 564-4201 POSITION STATEMENT: Provided testimony on HB 393. JEFF LOWENFELS, President and CEO Yukon Pacific Corporation 1049 West 4th Avenue Anchorage, Alaska 99501 Telephone: (907) 265-3100 POSITION STATEMENT: Provided testimony in support of HB 393. JIM SYKES (PH) (Address not provided) Telephone: (Not provided) POSITION STATEMENT: Provided testimony on HB 393. ACTION NARRATIVE TAPE 98-39, SIDE A Number 001 CO-CHAIRMAN SCOTT OGAN called the House Resources Standing Committee meeting to order at 2:16 p.m. Members present at the call to order were Representatives Ogan, Masek, Barnes, Dyson, and Joule. Representatives Green, Hudson, Williams and Nicholia arrived at 2:16 p.m.; 2:30 p.m.; 2:34 p.m., and 2:44 p.m., respectively. HB 393 - DEVELOP STRANDED GAS RESOURCES CO-CHAIRMAN OGAN announced the only order of business today was House Bill No. 393, "An Act relating to contracts with the state establishing payments in lieu of other taxes by a qualified sponsor or qualified sponsor group for projects to develop stranded gas resources in the state; providing for the inclusion in such contracts of terms making certain adjustments regarding royalty value and the timing and notice of the state's right to take royalty in kind or in value from such projects; relating to the effect of such contracts on municipal taxation; and providing for an effective date." CO-CHAIRMAN OGAN stated there is a proposed committee substitute for HB 393, version 0-GH2006\P, Glover, 3/30/98. CO-CHAIRMAN OGAN explained the first change is on page 7, line 2, "or holds permits that the department determines are essential to construct and operate a qualified project;". The language says "or" now in order to elevate permit holders to the table. It used to be (D) in the criteria in version 0-GH2006\L, page 7, line 5. It was moved up to the first paragraph for emphasis. CO-CHAIRMAN OGAN announced that Representative Green has joined the meeting. CO-CHAIRMAN OGAN stated the second change is on page 15, line 23. The language now says, "is qualified to register to vote in this state and qualifies for a resident fishing, hunting, or trapping license under AS 16". The drafter did not change it the way he envisioned it so there is an amendment. He wanted the person to be a "registered voter" and to "qualify" for a resident fishing, hunting, or trapping license. The previous bill required a person to have a fishing, hunting, or trapping license. "I'm sure the Department of Game would love to have the extra revenue. I'm not sure it's appropriate to require someone to have a fishing or hunting license to be qualified as a resident." The residency description in Title 16 is pretty tight and appropriate to use in the bill. CO-CHAIRMAN OGAN stated the third and final change is on page 26, lines 15-18, "Nothing in this chapter prohibits or limits the legislature from soliciting or negotiating contract offers or proposals that provide for the periodic payments or adjustments described in this section." The language puts the legislature in the loop and if things aren't going well with the administration it doesn't prohibit the legislature from appointing a special committee to negotiate a contract. Number 112 REPRESENTATIVE RAMONA BARNES stated she understands where Co- Chairman Ogan is going with the addition, but contracts for natural resources and things of that nature have to come out of the commissioner of natural resources or revenue and be presented to the legislature for action. She suggested asking someone from Legislative Legal Services for clarification. Number 120 REPRESENTATIVE REGGIE JOULE wondered if there is going to be an opportunity to hear from folks about the proposed changes. CO-CHAIRMAN OGAN replied certainly. Number 141 REPRESENTATIVE BARNES made a motion to adopt the proposed committee substitute for HB 393, version 0-GH2006\P, Glover, 3/30/98, for consideration. There being no objection, it was so adopted. Number 150 REPRESENTATIVE JOE GREEN asked Co-Chairman Ogan whether he plans to take any proposed amendments before or after the testimony. He has one amendment. Number 156 CO-CHAIRMAN OGAN replied he would like to wait until after the testimony. Number 163 REPRESENTATIVE BARNES asked that the amendments be distributed to the committee members for review. Number 184 GEORGE FINDLING, Business Development Advisor for the Gas Commercialization Group, ARCO Alaska, Incorporated, testified in Juneau. The testimony he gave in the House Oil and Gas committee in regards to ARCO's gas commercialization plan and how HB 393 supports the plan is still applicable today. Number 210 REPRESENTATIVE BARNES pointed out to Mr. Findling that this is not the House Oil and Gas committee so either give testimony or make it available to the committee members. MR. FINDLING provided copies of his testimony from the House Oil and Gas committee to the committee members. REPRESENTATIVE BARNES stated since the committee members have not had the privilege of hearing his testimony could Mr. Findling present a brief overview. MR. FINDLING stated the testimony from November 12, 1997 indicates a four-point work plan for advancing gas commercialization by reducing project costs; developing a viable project structure; developing a viable market; and pursuing federal and state fiscal, regulatory, and commercial matters. The testimony also references gas-to-liquids (GTL) technology, the development in that area and how it plays as a dark horse in its plans. The testimony from February 24, 1998 layouts how HB 393 fits into the overall plan of ARCO. Number 280 REPRESENTATIVE BARNES asked Mr. Findling whether he is familiar with the Pedro H. van Meurs study. MR. FINDLING replied, "Yes." REPRESENTATIVE BARNES asked Mr. Findling whether he believes the study is as valid today as when it was presented to the legislature over one year ago. MR. FINDLING replied yes in general the study is still valid. "I don't know--maybe some of the particulars might be different, but...." REPRESENTATIVE BARNES asked Mr. Findling like what particulars might be different. MR. FINDLING replied, "I say, I don't know." REPRESENTATIVE BARNES asked Mr. Findling whether it is ARCO's position that it is presently working to develop a liquid natural gas (LNG) project including a pipeline from the North Slope to Valdez. MR. FINDLING replied yes the base development plan that ARCO is pursuing right now is an LNG project. The basic assumptions are a gas pipeline from Prudhoe Bay to Valdez, liquefy it, then ship it to Far East markets. REPRESENTATIVE BARNES asked Mr. Findling, to his knowledge, when the contracts in Asia expire - generally - for the gas presently being supplied from the field. MR. FINDLING replied he does not have that knowledge at his fingertips. He would be speculating if he tried to recite contract expiration dates. REPRESENTATIVE BARNES stated in earlier testimony he said he is familiar with the Pedro van Meurs report. Now, he says he does not have the general knowledge found in Mr. van Meurs' report of the time frame of the gas to the marketplace. MR. FINDLING replied he understood the question to be of the expiration date. The general perception of the marketplace is that supply and demand are in balance through the year 2005 and a little bit beyond. Demand starts to exceed supply significantly starting in the year 2007. REPRESENTATIVE BARNES asked Mr. Findling where he came up with a 2007 time frame. MR. FINDLING replied market supply and demand, and projects are not his areas of expertise. He is trying to convey a general sense of what he understands. The company could bring somebody down, if that is the area of emphasis she would like to hear about. REPRESENTATIVE BARNES stated it comes as no shock to Mr. Findling or anyone else in the room the immense importance of the time frame that makes Alaska gas marketable in the world. She wants to know precisely why throughout the testimony on developing gas on the North Slope over the last one and a half years, when Dr. van Meurs has clearly said the gas must be in the marketplace by 2005, the oil companies say 2007. The contracts with Korea and Japan will expire in the year 2004. MR. FINDLING replied perhaps the best thing would be to get a more specific answer. REPRESENTATIVE BARNES stated she will await his answer. CO-CHAIRMAN OGAN asked Mr. Findling when he might have the answer. MR. FINDLING replied he would put a request in immediately. It should not be too long. CO-CHAIRMAN OGAN announced Co-Chairman Hudson and Representative Williams joined the meeting sometime ago. REPRESENTATIVE FRED DYSON suggested using his phone in his office to see if someone could testify via telephone today. MR. FINDLING stated he could certainly do that. REPRESENTATIVE JOULE stated if Mr. Findling can't find somebody now the committee will be reconvening at 5:00 p.m. today. Number 365 BEVERLY MENTZER, Alaska Gas Commercialization Manger, Exxon Company, USA, testified in Juneau. Exxon is committed to commercializing gas on the North Slope. It represents over one- half of its gas reserves. It will take a combination of fiscal and regulatory modifications, favorable market terms, and significant cost reductions for a North Slope project to be competitive and commercially viable. Exxon has been and continues to devote a significant amount of its technical and financial resources on its efforts. Exxon supports the bill. It provides reasonable guidelines and boundaries for the development of a fiscal contract. It keeps key options open for the state to maximize the value of its gas resources. It does not contain a specific fiscal term or mandates the method for commercialization. It provides the opportunity for input from the legislature, the affected municipalities, and the public during the contract development stage. It appropriately requires legislative review and authorization of any fiscal contract. The passage of the bill is a necessary step in the process of developing appropriate fiscal terms for the life of a gas project. Such a fiscal contract could increase the competitiveness of a gas project while maintaining the long-term fiscal interest of Alaska. Number 390 REPRESENTATIVE BARNES stated Ms. Mentzer's position in the past has also indicated that the year 2007 is the most viable date for Alaska's gas to enter the marketplace. MS. MENTZER replied that is true. REPRESENTATIVE BARNES asked Ms. Mentzer what she basis the year 2007 on. MS. MENTZER replied Exxon has looked at supply and demand forecasts of companies and governments currently involved in the LNG business. The information said that supply and demand in the Far East region is in balance through at least the year 2005. "Now, there's a wide range of variation between base-case, low-side, high-side forecasts from each of those consultants or governments. And, so, if you focus on 2010, for example, the data said that it might range from a low demand of 2 million ton to a high near 50, averaging in the 25 to 30 million ton range. And, that's due to variations and assumptions that can be made due to economic growth in the different regions, which obviously is always the prediction not knowing until the time occurs." Exxon has also looked at the projects developing in the marketplace and saw about 90 million tons of projects competing with the increasing gap between the supply and demand. Therefore, Exxon can say that the year 2007 is a viable option for a target. Exxon won't know exactly until it is out in the market and sees what is actually happening. There are other sensitivities in addition to just economic growth. Some countries are deregulating their power markets and independent power producers are being allowed to come in to bid, which would also bring more competition for liquid fuels. There are gross projections for the construction of nuclear plants. There are issues on CO2 admissions. Japan's government has also requested its power cost be reduced by 20 percent. In the mist of all of those factors and uncertainties, the year 2007 is a realistic representation of what might be possible for Alaska. Number 442 REPRESENTATIVE BARNES asked Ms. Mentzer whether Exxon has a report that disagrees with Dr. van Meurs' report. MS. MENTZER replied she does not remember Dr. van Meurs picking a date in his report. REPRESENTATIVE BARNES replied, "I do very clearly." She said, "In that particular scenarios, that to make our gas project financially feasible, we must be able to put 15 million metric tons a year into the marketplace. And that to be able to do that with all the competing market--with all the competing projects in the world which Exxon owns several. Do you not?" MS. MENTZER replied, "Correct." REPRESENTATIVE BARNES further stated, "With all those competing projects that we in fact have to have Alaska's gas into the marketplace to fill that window to make it financially feasible. Is that not what van Meurs said, or am I mis-quoting him?" MS. MENTZER replied that is not her recollection of what he said. REPRESENTATIVE BARNES stated she will get the report. She asked Ms. Mentzer whether she is familiar with the 15 million metric tons per year. MS. MENTZER replied, "I'm familiar with that." REPRESENTATIVE BARNES further stated van Meurs then goes into listing any number of projects that compete with Alaska's gas project. She asked Ms. Mentzer whether that is true. MS. MENTZER replied Dr. van Meurs analyzed all of the potential projects. REPRESENTATIVE BARNES stated for Alaska to be able to compete in the marketplace it has to be there and have 15 million metric tons per year. She asked Ms. Mentzer whether she is familiar with that. MS. MENTZER replied, "That's right." REPRESENTATIVE BARNES stated it is based on the expiration date of the contracts. "And what you just said about the expanding or contracting economies in Asia, I think, we all know that they have a contracting economy. Do we not? Are we not bailing out Korea to 'x' number of billion dollars? There's a real downturn in the economy in Japan and all over Asia so that we can not expect that they're going to be expanding at any rate of expansion that would allow for more gas than what van Meurs spoke about. Are we?" MS. MENTZER replied Exxon expects the economies to continue to grow, but not at the same pace. REPRESENTATIVE BARNES replied, "Based on what?" She asked Ms. Mentzer to bring to the committee members the information that Exxon basis her reply on. CO-CHAIRMAN OGAN asked Ms. Mentzer whether she happens to have that information available. MS. MENTZER replied not at the moment. CO-CHAIRMAN OGAN asked Ms. Mentzer when the committee can expect that information. MS. MENTZER replied she will let him know as soon as she can tell him when to expect it. CO-CHAIRMAN OGAN announced that Representative Nicholia has joined the meeting. CO-CHAIRMAN OGAN called on Rick Glover from Legislative Legal Services. REPRESENTATIVE BARNES referred to page 26, lines 15-18 that reads as follows: "Sec. 43.82.650. Contracts developed by the legislature. Nothing in this chapter prohibits or limits the legislature from soliciting or negotiating contract offers or proposals that provide for the periodic payments or adjustments described in this section." REPRESENTATIVE BARNES asked Mr. Glover to walk the committee members through what the section refers to. It is her understanding that the legislature, as the policy making group of the state, does not negotiate contracts within the purview of the commissioner of natural resources or revenue. RICK GLOVER, Attorney, Legislative Legal and Research Services, Legislative Affairs Agency, stated it is a separation of powers problem. It is intended to state that the application process described in the rest of the bill is not exclusive. It doesn't preclude the legislature from doing these things, from soliciting or negotiating contract offers. That's as far as it goes. If the legislature attempted to execute those contracts, then there is the possibility of a separation of power. REPRESENTATIVE BARNES stated, if the legislature attempted to operate this section, then it could be held unconstitutional. MR. GLOVER replied the actions of the legislature in attempting to execute and negotiate contracts would be unconstitutional, not the section. REPRESENTATIVE BARNES asked Mr. Glover how long has he been with the Legislative Affairs Agency. MR. GLOVER replied since October of 1997. REPRESENTATIVE BARNES asked Mr. Glover whether he has had an occasion to study the minutes of the constitutional convention. MR. GLOVER replied, "I have to some extent." REPRESENTATIVE BARNES referred to a memo written by Mr. Glover dated March 30 that indicates the bill does not comply with Article IX, Section 1, "Taxing Power," that reads as follows: "The power of taxation shall never be surrendered. This power shall not be suspended or contracted away, except as provided in this article." REPRESENTATIVE BARNES asked Mr. Glover whether he has studied the minutes of the constitutional convention that relate to taxing power. MR. GLOVER replied, "I haven't run across those particular minutes of--for that particular section of the constitution, no." REPRESENTATIVE BARNES said, "Well than, I would suggest to you that before you write this in the bill again or in any other document, that you go and specifically research what the framers of our constitution said as they relate to the legislature being able to contract or to suspend taxes as it relates to the development of projects. Because there is a very definite section of the constitution, no, minutes that relate particularly to that section. I particularly don't want to see anything else handed out like this until you have thoroughly researched it. And, if you don't have the documents available to you, I'll get them for you." Number 563 REPRESENTATIVE BILL WILLIAMS asked Mr. Glover to explain where he was coming from in writing the letter. MR. GLOVER stated he was concerned about the plain text of the constitution. The words indicate that the legislature is not to suspend or surrender taxing power in a way that future legislatures cannot re-enact a tax. He was also concerned about the types of contracts that would be contemplated by the bill. Certain taxes would be prohibited from being reimposed in the future by contract because, if such a tax was enacted, it would impair an obligation of a contract - another constitutional issue. REPRESENTATIVE WILLIAMS stated he is very concerned about this portion of the bill because it may fall under the separation of powers issue. It is similar to a board member soliciting contracts which is no way to run a business. REPRESENTATIVE BARNES asked Mr. Glover whether he is familiar with the MAPCO contracts. MR. GLOVER replied he is familiar with a pending contract for the disposal of royalty oil and gas. REPRESENTATIVE BARNES asked Mr. Glover whether he is familiar with the Northstar contract. MR. GLOVER replied only tangentially. REPRESENTATIVE BARNES asked Mr. Glover whether he is familiar with the Tesoro contract. MR. GLOVER replied, "No." REPRESENTATIVE BARNES said, "Well, I suggest that before you put out any more opinions that relate to taxation and contracting that you go take a look at how we have done this in the past." MR. GLOVER stated he understands that there is litigation pending.... REPRESENTATIVE BARNES said, "I...I...on one of them just one that's Northstar. And for your information we're gonna win." CO-CHAIRMAN OGAN called on Commissioner John Shively from the Department of Natural Resources. Number 620 JOHN SHIVELY, Commissioner, Department of Natural Resources, stated the department doesn't see a problem with the first two amendments. It opposes the amendment that allows the legislature to independently negotiate contracts. It is unprecedented. REPRESENTATIVE BARNES asked Commissioner Shively whether he hired Pedro van Meurs. COMMISSIONER SHIVELY replied he did not. The Administration did. REPRESENTATIVE BARNES asked Commissioner Shively whether he stands behind the report provided to the legislature last year. COMMISSIONER SHIVELY replied, "We think that report provided valuable information to us and to the legislature." REPRESENTATIVE BARNES asked Commissioner Shively whether a lot was paid for it. COMMISSIONER SHIVELY replied, "I assume so. I don't know how much." REPRESENTATIVE BARNES asked Commissioner Shively whether it came out of his budget. COMMISSIONER SHIVELY replied, "No." REPRESENTATIVE BARNES asked Commissioner Shively whether he has heard anything that would make the gas viable on the world market beyond the year 2005 when the contracts expire in the Pacific Rim countries. COMMISSIONER SHIVELY replied he has heard discussions with people in the industry that there could be other dates. Some believe it is a window for further opportunities, and some believe it is a door. REPRESENTATIVE BARNES asked Commissioner Shively whether there has been an updated report by van Meurs or anybody else to his knowledge. COMMISSIONER SHIVELY replied there hasn't been an update to that report to his knowledge. REPRESENTATIVE BARNES asked Commissioner Shively whether the date 2005 is like "pulling a rabbit out of a hat." COMMISSIONER SHIVELY replied the date has always been an issue for discussion. There are people who feel very strongly about the date and others who feel differently. He doesn't know whether it is like pulling a rabbit out of a hat, however. REPRESENTATIVE BARNES stated if Commissioner Shively really wanted to develop the project that he would work as expeditiously as possible to get the gas into the world marketplace. COMMISSIONER SHIVELY replied, "Obviously we should work expeditiously. We've put a fair amount of effort in trying to meet that lofty goal." REPRESENTATIVE BARNES stated she has been trying to help him. COMMISSIONER SHIVELY replied, "We recognize that you're trying to help us." Number 671 CO-CHAIRMAN OGAN recessed the meeting until 5:00 p.m. CO-CHAIRMAN OGAN called the meeting back to order at 5:07 p.m. TAPE 98-39, SIDE B Number 000 CO-CHAIRMAN OGAN explained he has some letters from ARCO in response to Representative Barnes' questions earlier. CO-CHAIRMAN OGAN recognized Representative Hodgins and asked him to join the committee members at the table. Number 055 DAVID BROOKS, Manager - Alaska Gas, BP Exploration (Alaska) Incorporated, testified in Juneau. The bill addresses the issue of the commercialization of the gas reserves on the North Slope. Today in Prudhoe Bay, there is some 25 trillion cubic feet (tcf) of gas. The United States Geological Survey (USGS) suggests that there could be in excess of another 100 tcf of gas yet to be found on the North Slope. The proven and yet to be found reserves amount to another oil field at least the size of Prudhoe Bay. It represents a very large commercial price for BP, the state, and people of Alaska, if we can find economical ways to get the gas to the market in some form or another. BP is taking the issue of commercialization of those gas resources very seriously and continues to dedicate resources to explore routes to commercialize it. The gas commercialization report published in January is a very sound and professional review of the challenges surrounding the commercialization of the gas. The bill is the next logical step recommended in the report. MR. BROOKS further stated that today some seven and one-half billion cubic feet of gas is produced. The majority is used in enhanced oil recovery initiatives. BP has estimated that the initiatives have increased the oil recovery reserves by two billion barrels, and about 40 percent of Prudhoe Bay's oil production is attributed to enhanced oil recovery and gas injection techniques. At $16 per barrel of crude oil, the additional production generates some $400 million a year for the state. BP believes that the bill is important for the state and development of stranded gas. However, it is only enabling legislation; it does not commit the state to anything other than to enter into negotiations. It creates options and as such BP supports it. MR. BROOKS further stated BP's perception today is that the gas in Prudhoe Bay cannot competitively be brought to the market. The bill creates an option for the discussion of the North Slope gas and any other gas that might be found in the future. The bill also leaves open the route to the commercialization of that gas. The bill is applicable to both an LNG and GTL projects. Although today, neither are commercially viable, but BP hopes that one or two or both will be at sometime in the future. They are not mutually exclusive. MR. BROOKS further stated the bill creates an option, an opportunity for a qualified sponsor of a qualified project to enter into negotiations with the state and to define a fiscal contract specific to a project. The contract will be subject to the approval of the legislature which will define the taxes and the extent to which it intends to bind future legislatures to the fiscal treatment of the projects. The bill provides an opportunity to address the fiscal risks. The bill is also balanced in that it considers other issues important to the people in the state. The project sponsor is responsible for maximizing the use of Alaskan labor and contracts, something which BP strongly supports. The bill incorporates a process by which the communities can assure themselves that they are being fairly treated in the negotiations and distribution of taxes. MR. BROOKS further stated, in conclusion, the bill creates options for the state to generate value from the enormous amount of gas on the North Slope. The bill gives nothing away; it only allows for negotiations to take place. BP urges the committee members to leave the bill as it is and to not turn it into a gas pipeline bill. BP also urges the committee members to reconsider the sunset clause. It closes off options for the future. BP recommends that the sunset clause be deleted. Number 214 REPRESENTATIVE BARNES asked Mr. Brooks whether he enjoyed his trip to Taiwan. MR. BROOKS replied, "Yes." REPRESENTATIVE BARNES asked Mr. Brooks where he got the figure 25 tcf. MR. BROOKS replied it is the published figure of the reserves for Prudhoe Bay. REPRESENTATIVE BARNES stated all of the published reports that she has seen say at least 31 tcf of known reserves, and another 11 tcf off Point Thompson. MR. BROOKS replied the 25 tcf is the figure published for Prudhoe Bay. There is perhaps another five tcf available in Point Thompson, and there are much larger reserves that have yet to be found. The USGS thinks there could be up to another 100 tcf available on the North Slope. REPRESENTATIVE BARNES asked Mr. Brooks whether the gas on the North Slope is being used to re-enhance the recovery of oil. MR. BROOKS replied, "Yes." REPRESENTATIVE BARNES asked Mr. Brooks, if the project is to go forward in a timely manner, is there enough gas to re-inject into oil without any substantial problems to Prudhoe Bay's oil recovery. MR. BROOKS replied the gas commercialization report published by the state shows there will be oil loss by producing gas through an LNG or any other type of project, but the economics of a total system show that an LNG project would adequately compensate for any oil losses. REPRESENTATIVE BARNES asked Mr. Brooks how much of the oil does BP own under contract in Prudhoe Bay. MR. BROOKS replied BP owns 55 percent of the oil in Prudhoe Bay. REPRESENTATIVE BARNES asked Mr. Brooks if the state is to go forward with a gas production project would BP own the same portion of gas. MR. BROOKS replied BP's share of the gas is approximately 20 percent. REPRESENTATIVE BARNES asked Mr. Brooks whether BP is economically interested in pursuing a gas pipeline with the vigor that others might have. MR. BROOKS replied, "I can assure you that BP is working the option of commercializing gas very hard. It owns 20 percent of a very large reserve up there, and it believes there is a lot of value, if that gas can be brought to market economically." REPRESENTATIVE BARNES stated the rate of return is dependent upon the ramp-up speed of a gas project, and a long-distance gas pipeline. The quicker the pipeline can be filled with production the higher the rate of return. She asked Mr. Brooks whether that is correct. MR. BROOKS replied, "Yes." REPRESENTATIVE BARNES asked Mr. Brooks, if we were able to get the gas to the marketplace with a relatively short ramp-up period, whether there would be a higher rate of return for ARCO than BP. MR. BROOKS replied he has difficulty answering the question. He is not privy to ARCO's economics. REPRESENTATIVE BARNES stated all we have to do is look at how much of the gas ARCO owns versus BP. MR. BROOKS stated, from an economic point of view, if BP and the other company invested proportionately in a project according to their equity shares of gas the rate of return would be exactly the same. BP would have a smaller proportion. REPRESENTATIVE BARNES asked Mr. Brooks whether leaving the gas in the ground as long as possible is in the best interest of BP in the long-term. MR. BROOKS replied it is not in BP's long-term interest. It is the interest of BP to try and commercialize the gas as efficiently and quickly as possible. REPRESENTATIVE BARNES asked Mr. Brooks whether he is familiar with the gas contracts held in Asia and their expiration in the year 2004. MR. BROOKS replied, "Yes." REPRESENTATIVE BARNES asked Mr. Brooks whether he is aware that in order to have an economically viable contract the state must have contracts in place by the year 2005. MR. BROOKS replied he is not aware of that. REPRESENTATIVE BARNES stated somebody should give Mr. Brooks the reports. REPRESENTATIVE BARNES stated the reports say the state needs to have the gas in the marketplace by the year 2005 because the smaller projects around the world, primarily owned by BP and Exxon, will "nibble to death" the Alaska project. She asked Mr. Brooks whether he is familiar with the term "nibble to death" in van Meurs' report. MR. BROOKS replied, "Yes." REPRESENTATIVE BARNES asked Mr. Brooks whether he agrees with it. MR. BROOKS replied around the year 2005 some contracts will terminate - the Arun projects in Indonesia. Those contracts supply a range of Japanese electrical and gas companies, and a Korean gas company. BP understands that it is Pertamina's objective to take the buyers from the Arun project and supply them through a mixture of two more Indonesian projects - an expansion of the Bontang project and a new project in Irian Jaya. Over the years the market will grow creating a supply gap that will be available to Alaska or any other competitive project. REPRESENTATIVE BARNES referred to the nibble-to-death concept, and asked Mr. Brooks whether there are plenty of other projects to displace Alaska, if it can't get its gas to the marketplace. MR. BROOKS replied, "Yes." There are perhaps 100 million tons of potential LNG supply, including expansion projects in Malaysia, the Middle East, and Australia; and green field projects in Indonesia, Malaysia III, and Alaska. There is about 50 million tons of demand through the years 2010 to 2015. REPRESENTATIVE BARNES stated the whole premise is that Alaska has to get its gas into the market place in a timely manner, otherwise it stands the risk of getting nibbled to death. Each company testifies about an expanding market, when there is nothing to base it on due to the present Asian economy. She asked Mr. Brooks whether the only way for gas to be supplied to China is for a company to develop gas facilities there. MR. BROOKS replied China is a potential market. Its energy demand is currently supplied by coal. There are companies looking at LNG imports into China. BP is working with the Chinese government to look at two LNG terminals in southern China. It will be a case of not only developing the terminals, but the power stations and the reticulation systems. China is opening up to those sorts of investments and looking for LNG, but it is starting conservatively. China wants to test it first and if it works it will expand it in due course, but it would be well after the year 2010. REPRESENTATIVE BARNES stated there is no guarantee that China is a potential market because there is other gas that could displace Alaska. She asked Mr. Brooks whether the expanding markets in Korea, Japan and Taiwan are contracting rather than expanding. MR. BROOKS replied BP has gas exploration offices in Tokyo, Seoul, China, and Taiwan. BP views Korea as a problem. Its economy is contracting, but most expect it to come out of its financial problems in three years and return to its 6 to 7 percent growth rate. Therefore, in about three to five years Korea could start thinking about additional LNG imports. MR. BROOKS further stated Japan has been in a depression since 1991. Japan committed to a lot of LNG at the end of 1989 through Malaysia and the Middle East. Currently, it has a little bit of LNG indigestion: low growth rates, low demand, but high LNG. MR. BROOKS further stated Taiwan has not been affected by the financial crisis in Asia. It still imports six million tons a year of LNG. By around the year 2015.... REPRESENTATIVE BARNES stated BP went to Taiwan on March 28, 1998 and gave a presentation to several Taiwanese companies at which time BP said that the earliest it could get Alaska gas to the market is the year 2010, and most likely not until the year 2015. BP was very specific about the dates. She said, "I have lots of contacts with those folks so when somebody from Alaska or a company in Alaska opens their mouth, it comes back to me pretty fast." She is concerned about what the dates mean to the buying markets. MR. BROOKS replied BP tries to present to everybody around the world an honest view of what it believes the prospects are. "It's is BP's view that an Alaskan LNG project will best suit the market in the year 2010, 2015. That is a combination of the fact that it is a very difficult project to do as identified in the gas commercialization report. The project is not yet competitive. And when you put that together with the problems of reduced LNG demand in Southeast Asia all of those things begin to suggest 2010, 1015. It may change. This is something--a reason we have these meetings in different parts of the world. It's so we can meet with people in the market to put out toe in the water to find out what is happening. The next change--the next review of that we're going to have in the middle of year when the Japanese have done their next years energy forecast. Those dates may change, but as of today, BP believes that 2010, 2015 is a reasonable time line for an Alaskan LNG project." REPRESENTATIVE BARNES stated the committee should set the sunset date back so that BP would have a shorter time frame. It makes no difference that the state is guaranteeing through legislation that it wants to work towards making this a financially viable project. "I think because of BP and primarily EXXON and other projects around the world, and your interest which is stuck into this bill, in 'new technology' which would, in my opinion, a whole different taxing regime that we would supply through this piece of legislation." This is a very serious project. Number 550 REPRESENTATIVE WILLIAMS asked Mr. Brooks how big of an employer is Alaska in the world gas market. MR. BROOKS replied because of the size of the capital investment BP would have to produce 14 million tons of LNG a year, approximately one-quarter of the gas market today. An LNG project on the North Slope would make Alaska a very big player, and would place a lot of LNG gas into the market. He can't think of any project that has started at 14 million tons. "Alaska is going for 14 million tons and needs to ramp it up that start and go from zero to 14 million tons and to ramp it up to get the economics to work in about six years. And, that is a major challenge for an Alaskan LNG project." REPRESENTATIVE WILLIAMS asked Mr. Brooks how would Alaska raise the economic side and where is the market. MR. BROOKS replied at the moment the market is in Japan and Korea. There is a small market in China and one developing in India. They don't help, however. They might increase some of the opportunity and reduce some of the nibbling referred to earlier. Taiwan is a possible market, but it is small and growing in small proportions. It is also another 1,300 miles from Alaska which would require additional ships and increase the cost of a project. MR. BROOKS further replied it is hard to control the price of gas because it is linked to oil prices. Therefore, the way to make an LNG project economical, "is to aggressively undertake a whole series of work programs to cut the cost of the project." REPRESENTATIVE WILLIAMS asked Mr. Brooks once Alaska gets into the gas marketplace whether it will be the largest gas provider in the world. MR. BROOKS replied it would be one of the largest. The largest at the moment is Indonesia. REPRESENTATIVE WILLIAMS asked Mr. Brooks how far along is Indonesia. MR. BROOKS replied the project in Indonesia - Arun - is running out of gas. The contracts will run out around the year 2005. The Bontang project is producing eight LNG trains (3 millions tons). It might build another train that would take some of the contracts from the Arun project. REPRESENTATIVE WILLIAMS stated he is concerned about the nibbling mentioned earlier. He wondered whether Alaska could control some of the nibbling because it would be so big. MR. BROOKS stated Alaska has a lot of advantages as an LNG supplier. The gas is prudent. Everybody knows it is there. Alaska has a stable political environment. However, it would require an 800-mile pipeline across some very difficult terrain. There is no other LNG project that has that challenge before it. If the challenge could be overcome, the cost of the project reduced to make it competitive, then Alaska could compete with the "nibblers" by edging them out. REPRESENTATIVE WILLIAMS asked Mr. Brooks whether the gas companies are thinking of any innovative ways to get Alaska's gas to the marketplace. MR. BROOKS replied there needs to be an engineering program that would aggressively take the cost out of the project. Last week in Girdwood, BP held a workshop with EXXON, ARCO, Yukon Pacific, and other people from around the world, who had expertise in building and operating a gas pipeline, for ideas on how to build a gas pipeline. Many ideas were presented and BP is in the process of reviewing each one. In addition, BP is also looking at brining a pipeline to the northern side of Cook Inlet instead of Valdez thereby cutting out the Chugach Mountains. It is an attractive idea because it would save money. It would also bring the pipeline closer to the Anchorage area where there is a significant gas market that would help with the cost of the project. REPRESENTATIVE WILLIAMS asked Mr. Brooks whether he has heard that the route to Anchorage could save five years. MR. BROOKS replied he has not heard that. CO-CHAIRMAN OGAN called for a brief at ease. TAPE 98-40, SIDE A Number 000 CO-CHAIRMAN OGAN called the meeting back to order and called on Jeff Lowenfels from the Yukon Pacific Corporation. JEFF LOWENFELS, President and CEO, Yukon Pacific Corporation, testified in Juneau. Yukon Pacific is in favor of the bill. The committee prior to the House Resources committee has done quite a bit of work on the bill, as well as the gas commercialization team and other legislators. The bill beyond everything else demonstrates that Alaska is a good host country for an LNG project. Other countries help their companies compete which is what the bill does for an Alaskan project. People need to know that there has been a lot of work done on this project already. Yukon Pacific spent at least three years trying to go to Cook Inlet before going to Valdez. A preliminary environmental impact study was done by 23 federal and state agencies and they concluded that it is not a viable option. Order Number 350 from the Department of Energy rejected all options other than the Valdez option. There are some serious flaws in the Cook Inlet option. Fault lines and two virgin pieces of territory - Susitna and Minto Flats - would have to be crossed. The Castle Mountain Fault runs virtually through the entire area. It would not meet United States regulations for safety and there is no property on the Kenai side sufficient enough to put in an LNG facility. Number 078 REPRESENTATIVE HODGINS asked Mr. Lowenfels whether it means that there couldn't be a spur line to Cook Inlet. MR. LOWENFELS replied, "No." There could be a spur line to Cook Inlet, but there couldn't be an LNG facility on the north side of Cook Inlet. A spur line is a "no brainer." It can and should be done. REPRESENTATIVE HODGINS asked Mr. Lowenfels whether the hang-up would be the LNG facility. MR. LOWENFELS replied that would be one of the hang-ups. A pipeline would also impact Denali National Park and Preserve, the Minto and Susitna Flats, and cross several fault lines. REPRESENTATIVE HODGINS asked Mr. Lowenfels whether a spur line would come from Glennallen rather than the Fairbanks area and follow the railroad. MR. LOWENFELS replied, "Probably." A route couldn't follow the railroad because of Denali National Park and Preserve. REPRESENTATIVE HODGINS asked Mr. Lowenfels what size could a spur line be from Glennallen to Cook Inlet be. MR. LOWENFELS replied it could be any size to meet the needs. The needs have been identified between 300 to 500 million cubic feet a day - a pipeline one-quarter of the size that is being discussed for the main line. It could be put in with the minimum amount of controversy. It would be a buried pipeline. Number 134 REPRESENTATIVE BARNES stated when the legislature first started discussing a gas project a pipeline was proposed to cross western Alaska. She thought it was a delay tactic because of the time it takes to get permits. She asked Mr. Lowenfels how many years would it take to permit a project for a new route. MR. LOWENFELS replied, if it could be done, it would take a minimum of five to eight years. REPRESENTATIVE BARNES stated, according to BP, that would increase the time frame to the years 2020 or 2023. MR. LOWENFELS replied, "Well, you could be." REPRESENTATIVE BARNES asked Mr. Lowenfels whether he knows how many ships are available in the world to take the gas from Valdez to the points of use. MR. LOWENFELS replied there are no ships available. REPRESENTATIVE BARNES stated she was recently visited by the Japanese Consulate in Washington, D.C. who wanted to know if the state was interested in ships. Essentially, anyone that is interested in supplying ships to take gas is feasible. MR. LOWENFELS replied that's correct. At least fourteen ships would be needed at 14 million tons. REPRESENTATIVE BARNES stated she would give Mr. Lowenfels the name of the person interested. Number 188 CO-CHAIRMAN OGAN asked Mr. Lowenfels whether he would be willing to commit the permits to the gas producers as an equity partner. MR. LOWENFELS replied, "We've always said yes and the answer is still yes." CO-CHAIRMAN OGAN asked Mr. Lowenfels what level of engineering and cost estimating would be necessary before an offer could be made to the Asian market. MR. LOWENFELS replied, according to conversations with buyers, the only area where there is a large cost question is the pipeline itself. It has been estimated at $6 billion. Its technological twin, the Alliance Pipeline from northern Canada to Chicago, would come out four and one-half times higher on a per mile basis. Alaska's terrain might be worse, but it is not that much more worse. Alaska might have to ship things differently, but it is not that much different. It is clear to Yukon Pacific and to the buyers it spoke with that the state should be concentrating on lowering the cost estimates of a pipeline. "And the number that is kicked around is about $20 million and probably, maybe six months to do that. Once that number is in hand it is pretty easy for the markets to understand wether this project is going to be a $15 billion project or a $10, $11, or $12 billion project. That's the area that needs to be worked on, not the LNG facility, not the conditioning plant, not the ships." CO-CHAIRMAN OGAN asked Mr. Lowenfels whether, in his opinion, it could be done in the time line that is laid out in the bill. MR. LOWENFELS replied, "We believe so." It is very important to have a goal out there. There is no questions that there will be other projects that will get into the marketplace. These markets need gas. They might as well get it from Alaska. "The sooner this project can be available to the marketplace, the safer we all will be. There is high risk in waiting." REPRESENTATIVE BARNES asked Mr. Lowenfels whether he thinks it is necessary to get Alaska gas to the marketplace by the year 2005, 2007, 2010, or 2015. MR. LOWENFELS replied 2005 is the goal that the state should be shooting for, and it should never deviate from it. "I've never seen ever seen anybody sell something by standing up and saying 'we're not going to be ready in time when the market needs it.' That's not the American way. That's certainly not the Alaskan way." He hasn't heard anybody say that starting a project in the year 2005 is too early. It might be too early for one specific market, but because the state needs to ramp up quickly, it needs to get into the market quickly. In Taiwan, there are two companies that will take gas in the year 2005. Japan will take seven to nine million tons in the year 2007. In Korea, because of the delay in their economy, it is on a 2005 time frame. "Why would we possibly want to tell the competition we're not going to be ready so you guys go ahead and take the market. It's just idiotic and certainly not the American way of doing business." REPRESENTATIVE BARNES said, "If we had something firm that would cause these companies to want to not only buy this gas, but invest in it, wouldn't it be the one thing that would cause people to do this to see that we were able to negotiate contracts with companies to be able to finance this project." MR. LOWENFELS replied it is a very important point. That's what host countries do, and that's why this bill has all the potential in the world to show that the state is as good as any other host country, if not better. Number 285 REPRESENTATIVE JOULE asked Mr. Lowenfels to explain the term "ramp- up." MR. LOWENFELS replied, since not all gas can go to the marketplace on the first day, there would be a series of LNG trains. There would be about three distinct trains that might take five years from the first sale. It would be nice to sell about an additional four and one-half to five million tons every 18 months in a series of trains. REPRESENTATIVE JOULE asked Mr. Lowenfels whether the optimum would be around 14 to 15 million tons. MR. LOWENFELS replied for the first phase of the project. Once a pipeline is in, there wouldn't be a problem anymore because a project would be in place that could beat the economics of any other expansion project on the face of the earth. REPRESENTATIVE JOULE asked Mr. Lowenfels how long would it take the state to get to the 14-million-ton mark, assuming a start date in the year 2005. MR. LOWENFELS replied about four to five years. REPRESENTATIVE JOULE asked Mr. Lowenfels whether the discussion about hitting the year 2010 would be in-line, but not the full swing. MR. LOWENFELS replied there is a big difference between hitting the year 2010 with the first million than with the fourteenth million. He said, "Why would we ever want to let anybody else get in front of us? Why would we ever be afraid of having too much of the market? We're Alaskans and that's the way we do things. We go after as much as we can get. We do it as best way we possibly can. And I think that's what this helps us do." REPRESENTATIVE WILLIAMS stated each company has a different reason for entering into the marketplace. He asked Mr. Lowenfels how much money the Yukon Pacific Corporation has in the project today. MR. LOWENFELS replied $100 million. The CSX Corporation has $20 billion worth of assets. He has been working on a gas pipeline project for 15 years. He has his life into this project. He doesn't know where the other companies get their numbers, but he can say where he gets his numbers. He has met with the buyers for the past six years. He knows their gas demands. If the gas wasn't there, CSX would have kicked Yukon Pacific out a long time ago. He said, "Our interests, I think, align directly with the state's interests." There is at least 50 million tons of demand and 100 million tons of supply. REPRESENTATIVE WILLIAMS replied the state would also want to get as much for its gas as it could. The state is sitting in a good position because the gas isn't going anywhere. MR. LOWENFELS stated the problem is that the gas might not go anywhere for a long time, when there is a market out there today. REPRESENTATIVE WILLIAMS stated he doesn't want the state to get pushed into selling its gas because somebody has invested $100 million into a potential project. He wants to make sure that the market is there and that the gas can be retrieved economically. MR. LOWENFELS stated he understands that the state wants to get its economic rent. REPRESENTATIVE WILLIAMS stated he doesn't want the state to get pushed into a project. MR. LOWENFELS replied, "We are definitely pushing this project. We think the time has gone. The time is now. And everyday we wait, that delays this project, is a potential that that gas will sit in the ground for the next 100 years." Number 396 CO-CHAIRMAN BILL HUDSON asked Mr. Lowenfels to provide to him information on Alaska's technological twin he mentioned earlier. For example: Whose paying for it? What's going through it? Where is it running to? Number 401 REPRESENTATIVE BARNES asked Mr. Lowenfels whether the problem of stranded gas in the ground is because gas is continually being found and projects are being developed all over the world, and unless Alaska isn't able to get into the market, it might never get the gas out of the ground. MR. LOWENFELS replied, "Correct." The gas on the North Slope was suppose to go to the to the Lower Forty-Eight states in 1983. The project that he is sponsor of was suppose to go to the marketplace in 1997, but Middle East companies took the market because Alaska wasn't ready. And somebody else will take this market because people need electricity. REPRESENTATIVE BARNES asked Mr. Lowenfels whether part of the equation is the opening up of Russia and its gas potential. MR. LOWENFELS replied, "Absolutely." In fact, there are two projects in Sakhalin that are competing directly with Alaska. He said, "There's no reason why we ought to let the Russians sell the gas in front of the Alaskans, none." CO-CHAIRMAN OGAN stated Alaska used to have 100 percent of the market with Kenai LNG. MR. LOWENFELS stated Alaska has about 1.5 percent of the market now. If the North Slope was up and running, the state would have about 14 to 15 percent of the share, a very respectable share. Number 436 JIM SYKES (PH) testified via teleconference in Anchorage. We hope that this bill will enable an opportunity, but he has some serious questions. The legislature has the constitutional obligation to ensure that Alaskans get a fair share of it nonrenewable oil and gas resources. By the year 2010 crude oil demands will outstrip production by ten billion barrels which means prices will go up. We are concerned about the following: no discussions about the downside risks, the payments in lieu of taxes, and ensuring a competitive environment free from anti-trust. MR. SYKES stated the van Meurs report was written prior to the Asian financial crisis. It is also possible that large amounts of gas could flood the world marketplace after Alaska's project came online creating a low price for gas. The impetus in HB 393 for the state to take less when the gas prices are low and more when they are high is a true risk for the citizens of Alaska. The world does not need Alaskan gas. Arun has 35 projects the size of Alaska. The main question is, what is the state prepared to give up to make a gas pipeline project feasible? The idea has been on the horizon for over 20 years now, and if it is profitable, it probably would have been built by now. MR. SYKES further stated that since the bill doesn't specify whether the project will be LNG or GTL, he is reminded that according to Dr. van Meurs a gas pipeline would yield about $75 to $80 billion in taxable products - natural gas. The large corporations believe that natural gas could leave about $15 billion in taxable gas liquids. The $15 billion is about one-sixth the price of natural gas. If diesel is made, it would be extremely profitable by the petroleum companies because it is not currently taxed by the state. According to Dr. van Meurs, GTL would be a back-stop opportunity if a pipeline project did not materialize. There is a lot to consider how the natural resources directly affect the economic benefits to the state. MR. SYKES further stated the two tier system in version "L" would still leave open the question of whether periodic payments to municipalities would be adequate to compensate for the real cost of providing services associated with the influx of workers. There is also the question of whether a community should go into indebtedness to benefit a for-profit corporation which may or may not succeed. MR. SYKES further said the state has left an estimated $4.5 to $9.2 billion in royalties and taxes in return for the extraction of petroleum resources. It would have raised the permanent fund to the neighborhood of $30 billion instead of where it is today. The state has not demonstrated its ability to adequately regulate the oil industry for the maximum benefit of its citizens. The legislature should be aware that there are anti-trust actions before the Federal Energy Regulatory Commission on Occidental Petroleum Corporation. Before the courts in Alaska there is Maritime Endeavor v. Alyeska (ph). He suggested reading a book titled, The Big Squeeze. It offers a compelling history in Alaska of its settlements. CO-CHAIRMAN HUDSON explained to Mr. Sykes that the committee is operating off of version "P." Number 568 REPRESENTATIVE IRENE NICHOLIA asked Mr. Sykes whether he supports the bill in its current form. MR. SYKES replied having not seen version "P" he can't say. He was working off of version "L." We felt that the payments in lieu of taxes and boundaries for negotiations needed some work. We felt that the Administration was given an enormous amount of leeway to negotiate something that would not be open to public scrutiny. CO-CHAIRMAN HUDSON called on David Brooks from BP Exploration (Alaska) Incorporated again. Number 585 REPRESENTATIVE BEVERLY MASEK stated she is not totally convinced that this is the time for the bill. She is not against building a gas pipeline. She asked Mr. Brooks whether it is wise now to pursue incentives to develop the stranded gas, or should the state rely more on market conditions to determine when such a project should be developed. Number 595 MR. BROOKS replied it is necessary for a series of conditions to come together at one time for an LNG project to move forward. The competition in the Middle East, Malaysia and Indonesia negotiate specific fiscal regimes with their developers. The recommendation of the gas commercialization report was to try to create a level playing field in order to negotiate a fiscal regime with the sponsors in due course. The bill, in its present form, offers an opportunity for somebody to negotiate a contract with the administration, under closely defined conditions. The timing of negotiations will always be defined by the economic prospects. It creates an option for Alaska to have that discussion at sometime in the future when somebody believes the project is viable. Number 620 REPRESENTATIVE MASEK stated she is concerned that the legislature would react by accepting a contract that would give away more than normally, if the economy was depressed for example. She feels the state has a lot of time to look at the issue and it should not hurry. She is not against developing a gas pipeline, however. Number 643 REPRESENTATIVE JOULE asked Mr. Brooks whether getting the ball rolling through legislation would help the state get to the point it needs to be for the ramp-up process to meet the potential market demands. MR. BROOKS replied the ramp-up is a mixture of technical and commercial constraints. There are technical constraints because LNG plants can only be build so fast. Buyers in Tokyo and Korea take gas in small parts. The electric companies being built in those countries would have to match when they think gas will come to the market in order to import LNG, and the state would have to build its train to match it. The shorter the ramp-up the better, but there has not been a project in the world that has put 14 million tons of gas into the marketplace on a five-year ramp-up. He worked on an Australian LNG project that put six million tons in a five- to six-year ramp-up. It would be a huge challenge. TAPE 98-40, SIDE B Number 012 REPRESENTATIVE BARNES asked Mr. Brooks whether BP has committed to put another $6 billion into the Australian project. MR. BROOKS replied BP holds one-sixth of the shares in the Australian project. There are plans to expand the project. He could not comment on the overall cost of the project, but doubts it would $6 billion. REPRESENTATIVE BARNES explained she read an article that indicated BP has committed an additional $6 billion into the project. REPRESENTATIVE BARNES stated presently the amount of gas that goes into the market each year is about two and one-half million tons which is why it is important for Alaska to get into that "window of opportunity." In order for a gas project to be economically viable, Alaska would have to put 15 million metric tons per year into the market. The ramp-up would be over a three year time period. MR. BROOKS stated the market is pretty flat at the moment. REPRESENTATIVE BARNES stated the study by Dr. van Meurs reported that currently the total Pacific LNG market is increasing at two and one-half million tons per year, and many projects compete in the marketplace. This is why the state needs to get 15 million metric tons into the marketplace with a three-year ramp-up. REPRESENTATIVE BARNES asked Mr. Brooks whether the ships would be part of the cost of building a project. MR. BROOKS replied, "Absolutely." REPRESENTATIVE BARNES asked Mr. Brooks, if the ships were pulled out of the equation and someone else owned them, would it lower the cost of a project. MR. BROOKS replied either the sellers provide the ships or the buyers provide the ships. The Japanese prefer that the sellers provide the ships, and the Koreans prefer that the buyers provide the ships. It would be part of the commercial negotiations. According to BP, there would be two pipelines - one would go from Prudhoe Bay to the LNG plant and one that would go across the state to the sea. BP prefers to sell on a next-ship basis thru the sellers owning the ships. "We have investigated all different ways of acquiring those ships. At the end of the day what happens is you take those ships on long-term charter, if you have a contract with a buyer for 25 years, you've got to contract with the ship for 25 years. So, you make it a sales contract with a ship owner, and normally in those charter parties there is no (indisc.) clause so you cannot--if the plant blows up you still got to pay for the ships. And, if you go to accounting rules that is required in places like America and international accounting rules, you'll find that if you take a ship on long-term charter, you actually have to capitalize it so the capital of a ship on a 25 year charter would still go against the balance sheets of the companies who are sponsoring the projects." REPRESENTATIVE BARNES stated she doesn't know much about ships, but intends to learn about them. REPRESENTATIVE BARNES said, "Now, when we first started this discussion, my good friends from EXXON tried to do a snow job on me with a western pipeline. And, no permitting, or course, has been done for that. And, today, you've come along with a whole brand new different pipeline route that no permitting has been done on. And, so by my calculations here and what I've been told, we could end up with an extension of five to eight years of building this because there is no permitting. So, who, when did this new route come along when in fact we already have a pipeline corridor. You already know how to build a line in that corridor because we've built on. So, why in the world would we even think of building a different one when you would have to spend what the gentleman, Mr. Lowenfels, testified CSX has spent $100 million. Why in the world would we want to spend another $100 million when that would be figured in to the bottom line?" MR. BROOKS replied BP has done a lot of work on the pipeline route together with Exxon and ARCO. BP has looked at brining a pipeline down along the oil pipeline, building a terminal in Valdez, and selling the gas to Japan and Korea. BP has been able to reduce the cost estimates from $15 billion to $12 billion. According to the gas commercialization report, $12 billion would not be economical at the current price of gas. The answer is to try and find a way to cut the cost of a project to make it more economical. Unless the cost is brought down, it's going to be very difficult to market. REPRESENTATIVE BARNES replied the bill isn't needed then to give tax breaks if the cost only needs to brought down to $12 billion. MR. BROOKS stated the report said that even at $12 billion a project would not be economical. The big cost of a project is the pipeline. There has to be innovative ways to built it to bring the cost down and to make the project economical. Number 209 CO-CHAIRMAN HUDSON made a motion and asked unanimous consent to adopt Amendment 1, version 0-GH2006\P.1, Glover, 3/30/98, that reads as follows: TO: CSHB 393(RES), Draft Version "P" Page 15, line 23: Delete "qualified to register to vote in this state" Insert "register to vote under AS 15" CO-CHAIRMAN OGAN stated Amendment 1 changes the verbiage from qualified to register to vote to register to vote. REPRESENTATIVE WILLIAMS objected for discussion purposes. He doesn't want to tell somebody to vote. That shouldn't be held against somebody. "What kind of a country are we giving and taking somebody's right away." REPRESENTATIVE WILLIAMS withdrew his objection. CO-CHAIRMAN OGAN asked for further objection. There being no further objection, Amendment 1 was so adopted. Number 250 REPRESENTATIVE GREEN made a motion to adopt Amendment 2 that reads as follows: TO: CSHB 393(RES), Draft Version "P" Page 2, Line 12 after "(5) INSERT "Alaskans may desire a portion of the gas from a transportation project for in-state uses, however," Page 2, Line 14 after "...infrastructure for..." DELETE "at least INSERT "approximately' REPRESENTATIVE GREEN stated the first part of the amendment indicates that there might be a strong desire for instate use. REPRESENTATIVE GREEN stated the second part of the amendment keeps the focus on the next ten years. CO-CHAIRMAN OGAN asked whether there is any objection to Amendment 2. There bing no objection, it was so adopted. REPRESENTATIVE BARNES referred to page 26, lines 15 and 18 - "Nothing in this chapter prohibits or limits the legislature from soliciting or negotiating contract offers or proposals that provide for the periodic payments or adjustments described in this section." She stated that the legislature has established the revenue and natural resources department and if it truly wants to get into the negotiation process it can by taking back some of the powers given to those departments. However, the legislature doesn't want to get into that business. It is appropriate that a contract is negotiated and brought to the legislature, but this language should not be in the bill. REPRESENTATIVE BARNES made a motion and asked unanimous consent to delete the language on page 26, lines 15-18 - "Sec. 43.82.650. Contracts developed by the legislature. Nothing in this chapter prohibits or limits the legislature from soliciting or negotiating contract offers or proposals that provide for the periodic payments or adjustments described in this section." Number 296 REPRESENTATIVE DYSON asked Representative Barnes what would be lost by leaving the language in. REPRESENTATIVE BARNES replied there is no guarantee that anybody in the legislature will be here in the future. People are not real good at looking at the history of things, and the state could get into serious trouble with language like this. "We could have a legislature that feels that it's in their purview to go out and start negotiating contracts prior to the time that they would have changed the powers and duties of the commissioner of natural resources and prior to the time that they'd change the duties of the commissioner of revenue and thus it would become a separation- of-powers question." REPRESENTATIVE DYSON replied respectfully, so what. History proves that nothing we can do will preclude dumb things by succeeding legislators. Number 330 CO-CHAIRMAN OGAN asked whether there is any further objection. There being no further objection, it was so adopted. Number 334 CO-CHAIRMAN HUDSON made a motion and asked unanimous consent to move proposed committee substitute HB 393, version 0-GH2006\P, Glover, 3/30/98, as amendment, with individual recommendations and the attached fiscal note(s). Number 339 REPRESENTATIVE BARNES objected. The bill has been before the House Resources committee for a very abbreviated period of time. Traditionally, the standing committee should have some time to work on a bill that comes from a special committee. "The stranded gas language that relate to gas-to-liquid--I know very little about gas, but if I understand what little I know is that if you change gas to liquid you lose a large component of the gas. It becomes once it is converted into a tar-like substance. And, thus you are losing considerable amount of revenue that were it not turned into a tar-like substance before it would be transmitted down the gas line, the existing pipeline, that if it were sent through a natural gas pipeline you would have all those component parts that would be taken out at the other end and converted to all the different uses. So, having this rubbery-like substance that you end up putting back into the ground or disposed of in some other manner, that is part of the resource of the gas. But, I think it is not in the interest of the state. I do not think it is in the interest of the state just to say this is a 'stranded gas bill' and I'm sure that Representative Green knows a lot more about this than I do being an expert in the field of oil and gas. But, I feel there has been an awful lot of pressure put on this committee to move a bill without doing the work on it that needs to be done in the area of gas-to- liquids, in the area of the whole taxation structure because the taxing structure are the economics of gas-to-liquids is entirely different than that of sending gas down a pipeline. All of those things should be looked at. All of the issues that I have raised today with my limited knowledge of...The time frame needs to be addressed in this bill of when this gas needs to get into the market. We've got a sunset date in here, but today we've heard BP ask for a longer time frame. And to me, the shorter time frame you give to somebody with the carrot, the better of you're going to be because if they want that carrot bad enough then they're going to march forward and participate and take a hold of the economics of the whole situation." Number 396 CO-CHAIRMAN OGAN called for a brief at ease. CO-CHAIRMAN OGAN called the meeting back to order. Number 400 CO-CHAIRMAN HUDSON withdrew his motion in deference to additional information that would be beneficial to some folks before moving the bill out of the committee. Number 404 CO-CHAIRMAN OGAN announced the bill will be held over until Thursday, April 2, 1998, in order to get more information on LTG and how a tax regime affects it. ADJOURNMENT Number 419 CO-CHAIRMAN OGAN adjourned the House Resources Standing Committee meeting at 7:10 p.m.